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WASHINGTON, DC – Skeptical that Congress will end tuition tax credits they say disproportionately benefit higher- rather than lower-income students, advocates for reform want the tax breaks to at least be used to encourage colleges to raise their graduation rates and reduce borrowing.
Among their other proposals, a consortium of groups pushing for changes in the federal financial-aid system said eligibility for the tax credits should be based, in part, on which college or university a student chooses to attend. Institutions with poor graduation rates or low numbers of low-income students, or whose students finish with high levels of debt, would be excluded.
Another form of tax advantages for universities—those that subsidize bonds for campus construction projects—also would be changed under the reformers’ proposals, and colleges that fall short on success rates and enrollment of low-income students or have high student-loan default rates would not be allowed to get them.
“It’s a mighty strong lever,” Michael Dannenberg, director of higher education and education finance policy at the Education Trust, said of even the threat of using federal tax credits and exemptions to change universities’ behavior.
The federal government gives $34 billion a year in tuition tax credits, or $1 billion more than it spends on Pell Grants, the direct government grants for low-income college and university students. And even though only one-fifth of American households earn more than $100,000 per year, that group got more than half of the deductions for tuition, fees and exemptions for dependent students, according to the Tax Policy Center.
“What was originally designed as a tax credit to help middle-class families afford a higher education has become something that reaches up to the 90th, 95th percentile of income,” Dannenberg said.
Families with earnings of up to $180,000 can file for the tax breaks.
Meanwhile, tax-exempt bonds issued by universities and colleges are costing the federal government another more than $3.5 billion a year, research shows.
The Education Trust was one of four organizations that studied the financial-aid system and made suggestions for changing it. The others were the Center for Postsecondary and Economic Success, Young Invincibles, and the New America Foundation, which hosted a panel discussion on the topic.
At the beginning of their work, the groups wanted the tax credits eliminated altogether, said Stephen Burd, a senior policy analyst at the New America Foundation.
It’s “not a particularly effective form of financial aid,” Burd said, “with a substantial share of the money going to high-income families.”
But Congress is unlikely to end the tax breaks, the reform advocates said.
“Given the political realities,” Burd said, “we felt the best thing to do was to reform them.”